World Cup Connection Helps Mills Beat Bovespa: Corporate Brazil

By Ney Hayashi -
Jan 22, 2013

Stock investors searching for ways
to take advantage of Brazil’s construction boom in the run-up to
next year’s World Cup and the 2016 Summer Olympics are turning
to a little-known supplier of scaffolding and concrete forms.

Mills Estruturas & Servicos de Engenharia SA, a Rio de
Janeiro-based company that was left off the Bovespa benchmark of
69 stocks following its 2010 initial public offering, has soared
66 percent over the past year to 33.10 reais. The rally compares
with the Bovespa’s 1 percent decline and a 21 percent advance in
the country’s small cap index, which includes Mills.

While there are 452 companies with a market value of $1.2
trillion in Latin America’s biggest stock market, Mills is one
of just a few that are poised to directly benefit from the
building of roads, stadiums and subway stations before the first
World Cup soccer game begins, according to Schroder Investment,
Europe’s largest publicly traded money manager. That gives the
stock a scarcity value that will help propel more gains in the
$2 billion company, said Eduardo Carlier, head of core equities
at Schroder’s Brazilian unit.

“Options to invest in the sector are so limited that the
ones in the market deserve some premium,” said Carlier, who
owns Mills shares as part of the 3 billion reais ($1.5 billion)
he helps manage at Schroder in Sao Paulo. “It’s one of the few
companies that represent well the infrastructure sector in the
Bovespa.”

Mills trades at 26.1 times its forecast earnings for 2013,
the most expensive stock among the world’s five biggest
companies that get at least half of their revenue from renting
equipment, data compiled by Bloomberg show. That compares with a
ratio of 11.5 times for the benchmark Bovespa index and 13.7
times for the Bovespa’s Small Cap index.

2010 IPO

The company raised 686 million reais in an IPO in 2010,
more than five decades after it was founded in 1952. Mills rents
and sells equipment including concrete forms and lifts used by
construction companies and provides services such as painting
and heat proofing for industrial plants, according to its
website.

Investors are discovering the company even though
brokerages’ coverage of it remains limited. Seven analysts
review the company, less than a third of the number covering
Itau Unibanco Holding SA, Brazil’s biggest bank, or Cia.
Brasileira de Distribuicao Grupo Pao de Acucar, the country’s
largest retailer, data compiled by Bloomberg show.

Mills’s earnings per share will increase 38 percent to 1.75
centavos this year, and sales will expand 24 percent to 1.08
billion reais, according to the median estimate of those
analysts. Shares are forecast to jump 3.9 percent to 34.75 reais
in the next 12 months.

Infrastructure Development

Brazil is seeking to boost development of roads, airports
and other infrastructure linked to the sporting events by
providing financing at below-market rates. In exchange,
companies seeking licenses to build and operate the projects
must either pay the government a fee or agree to cap the rates
they charge. The government is aiming for 54.2 billion reais of
investment in ports through 2017 and 133 billion reais in roads
and railroads over the next 30 years.

Mills, the supplier of materials and equipment for
companies working on 11 soccer stadiums and on subway lines in
Sao Paulo and Rio de Janeiro, plans to invest 54 million reais
this year in its heavy-construction unit to meet increasing
demand, Investor Relations Director Alessandra Gadelha said.

‘Good Opportunities’

“The World Cup and Olympics present good opportunities for
the company, but the infrastructure sector in general has been
growing and will be more important in the longer run than those
isolated events,” Gadelha said in a phone interview from Rio de
Janeiro.

Gadelha declined to comment on the performance of the
Mills’s stock.

Companies that may profit from business related to
preparations for the World Cup next year include toll road
operators such as Cia. de Concessoes Rodoviarias and EcoRodovias
Infraestrutura & Logistica SA, which may bid for licenses to
renovate highways and expand airports, said Schroder’s Carlier.

Mills has an edge over those companies because it doesn’t
have to buy the licenses needed to run the projects nor is it
subject to the price caps, making its earnings less vulnerable
to government interference, Carlier said.

Shares of CCR, as Cia. de Concessoes is known, jumped 59
percent last year, while Ecorodovias advanced 24 percent.

While Mills is in a “good position” to benefit from
increased infrastructure spending in Brazil, its dependence on
projects that are financed or overseen by the government still
presents a risk for the company, said Marco Aurelio Barbosa, an
analyst at Sao Paulo-based Coinvalores brokerage.

‘Big Effort’

“Mills itself doesn’t have contracts with the government,
which is good, but it depends on clients that do have those
contracts, which makes the company a bit vulnerable after all,”
Barbosa said in a phone interview. “If there are any delays on
the construction works, or if the government decides to make
changes in the projects, Mills would be affected.”

Audrey Kaplan, who manages the $540 million Federated
InterContinental Fund (RIMAX), said Mills remains attractive after the
rally. She said she bought Mills shares “recently,” without
giving further details.

“Everybody in Brazil is worried about infrastructure
issues, but because of the World Cup and the Olympic Games
coming up quickly, we think there’s going to be a very big
effort to speed up the improvements,” Kaplan said by phone from
New York. “Mills has many construction projects going on in
urban mobility projects, airports, soccer stadiums. So this is
the great play on the infrastructure development in Brazil.”